To say that we live in uncertain times is a truism. It is well documented that the current geopolitical climate is putting considerable pressure on business. As commodity prices, interest rates and inflation continue to rise, companies run a growing risk of increasingly facing defaulting contracting parties. Under current Belgian law, contracts can still only be dissolved after such default has already taken place, forcing creditors to look on helplessly as they suffer further unnecessary damage. With the introduction of the anticipatory breach, this could soon be a thing of the past.
The anticipatory breach is a legal concept of Anglo-Saxon origin which has found wide acceptance in various European and international legal systems. In Belgium, this legal concept is currently only known through its adoption in the United Nations Convention on Contracts for the International Sale of Goods (CISG). Beyond that, the anticipatory breach is not generally accepted. The traditional article 1184 of the old Civil Code (CC), which stipulates the implicit resolutive condition in contracts, explicitly requires the occurrence of an actual breach of contract. This is based on the idea of “pacta sunt servanda” and the principles of good faith, which assume that a contracting party cannot invoke a breach of contract regarding obligations that have not yet become due.
With the arrival of the new law of obligations (Book V), the anticipatory breach is now also accepted under Belgian law (article 5.90, §2 new CC). This is part of a broader intention of the legislator to use extrajudicial instruments to render the enforceability of contracts and obligations more effective, to relieve the courts and to remedy the disadvantages of slow legal proceedings.
Nevertheless, the application of the anticipatory breach is subject to strict conditions (and rightly so):
- Exceptional circumstances must be present to justify an anticipatory breach;
- It must be clear that the legal obligation(s) will not be fulfilled;
- The ramifications of a potential contractual default must be sufficiently serious; and
- Prior to dissolution, the dissolving party must have urged its contracting party to provide sufficient guarantees that it will comply with its obligations within a reasonable period of time.
These conditions leave quite some margin for interpretation, which will have to be filled in by the courts in the coming years. For example, the legislator does not clarify what exactly is to be understood by “exceptional circumstances”, nor when a default inflicts “sufficiently serious ramifications” on a creditor. In this regard, it is worth noting that article 72 CISG refers to a “material breach”. Are these two concepts interchangeable, and can we thus revert to the case law that is already available under the CISG? Time will tell.
In parallel, article 5.239, §2 of the new CC also introduces the possibility of an anticipatory suspension. This means that a creditor, facing an impending default by the debtor, may choose to either dissolve the contract entirely, or to temporarily suspend the performance of his own obligations. This is similar to the existing regime in the event of an actual breach of contract.
Entry into force
The new Book V will enter into force on January 1st, 2023 and will only apply to new contracts concluded as of January 1st, 2023. Notwithstanding this, parties are free to pre-empt this entry into force and to include a termination clause in their contracts, providing for a situation of anticipatory breach.
The provisions on anticipatory breach and anticipatory suspension are merely default rules. This means that contracting parties will be able to contractually modulate their scope – for example, with respect to the required exceptional circumstances – or even exclude them entirely. Given the aforementioned uncertainty regarding the conditions of application and the necessary concretization by case law, this certainly deserves some attention while drafting any type of contract.
From a damage limitation point of view, the introduction of the anticipatory breach is an interesting and promising new feature. From now on, a creditor will no longer have to waste unnecessary time and resources when it is certain that the agreement will not be duly executed. An obvious risk, however, is that creditors will make wrong judgment calls and resort too quickly to dissolution, thereby unjustly putting their debtor(s) in trouble. After all, the mere fear of a default is vastly insufficient as to justify a valid dissolution of a contract.
Our dispute resolution team at Cresco has extensive experience with all types of (commercial) contracts and adjacent legal disputes. Do not hesitate to contact us.